[Federal Register Volume 62, Number 243 (Thursday, December 18, 1997)]
[Rules and Regulations]
[Pages 66424-66433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32657]



[[Page 66423]]

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Part III





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Parts 100 and 103



HUD'S Regulation on Self-Testing Regarding Residential Real Estate-
Related Lending Transaction and Compliance With the Fair Housing Act; 
Final Rule

  Federal Register / Vol. 62, No. 243 / Thursday, December 18, 1997 / 
Rules and Regulations  

[[Page 66424]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 100 and 103

[Docket No. FR-4160-F-02]
RIN 2529-AA82


HUD's Regulation on Self-Testing Regarding Residential Real 
Estate-Related Lending Transactions and Compliance With the Fair 
Housing Act

AGENCY: Office of the Assistant Secretary for Fair Housing and Equal 
Opportunity, HUD.

ACTION: Final rule.

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SUMMARY: This rule implements section 814A of the Fair Housing Act, 
which encourages voluntary compliance by lenders with the Fair Housing 
Act (FHAct) through lender-initiated self-tests of lenders' residential 
real estate-related lending transactions and, where appropriate, 
corrective action designed to remedy any possible violations of the 
FHAct revealed by such tests. This rule also makes technical amendments 
to the fair housing complaint processing regulations.

EFFECTIVE DATE: January 30, 1998.

FOR FURTHER INFORMATION CONTACT: Peter Kaplan, Director, Office of 
Policy and Regulatory Initiatives, Fair Housing and Equal Opportunity, 
(202) 708-2904. Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410. A telecommunications device 
for hearing-and speech-impaired persons (TTY) is available at (202) 
708-9300 (these are not toll-free telephone numbers).

SUPPLEMENTARY INFORMATION:

I. General. Incentives for Self-testing and Self-correction

    On January 31, 1997 at 62 FR 4882, the Department published a 
proposed rule to implement section 814A of the FHAct, promulgated at 
section 2302 of the Omnibus Consolidated Appropriations Act for Fiscal 
Year 1997 (Pub. L. 104-208, approved September 30, 1996). Section 2302, 
found in title II of Pub. L. 104-208, entitled the ``Economic Growth 
and Regulatory Paperwork Reduction Act'' (``Act''), amends the FHAct to 
promote compliance by establishing a privilege for lender-initiated 
self-tests of residential real estate-related lending transactions.

The Economic Growth and Regulatory Paperwork Reduction Act: Sec. 2302

    Section 2302 adds a new section 814A to the FHAct which creates a 
legal and administrative enforcement privilege for ``self-tests'' 
conducted by entities engaged in residential real estate-related 
lending to determine compliance under the FHAct. This provision also 
adds a new section 704A to the Equal Credit Opportunity Act (``ECOA'') 
which creates the same privilege with respect to credit transactions by 
a creditor. A report or result of a self-test is privileged from 
disclosure if a lender conducts, or authorizes an independent third 
party to conduct, a self-test of a real estate-related lending 
transaction to determine the level or effectiveness of compliance with 
the FHAct, and has taken, or is taking, appropriate corrective action 
to address possible violations discovered as a result of the self-test.
    The Act requires the Department, with respect to the FHAct, and the 
Federal Reserve Board (the Board), with respect to the ECOA, to 
implement section 2302 and define ``self-testing'' in substantially 
similar regulations within six months of enactment. This final rule was 
drafted after consideration of the comments the Department received on 
the January 31, 1997 proposed rule, and in consultation with the Board, 
the Department of Justice (DOJ), and appropriate Federal regulatory and 
enforcement agencies, including the Federal Deposit Insurance 
Corporation (FDIC), the Office of the Comptroller of the Currency 
(OCC), the Office of Thrift Supervision (OTS), the National Credit 
Union Administration (NCUA), and the Federal Trade Commission (FTC). 
The Act's requirement that the Board's and the Department's regulations 
be substantially similar, the comments received on the proposed rule, 
and the consultation which followed, delayed publication of the final 
rule beyond the six months the Act prescribed.
    After reviewing both regulations, the Department and the Board have 
determined that there is no substantial difference in the final rules 
and that they should be interpreted to have the same effect except 
where differences in the FHAct and ECOA dictate otherwise. For example, 
ECOA covers non-mortgage credit transactions which are not residential 
real estate-related transactions under the FHAct. This dictated slight 
differences in the definition of ``self-test'' in the agencies' rules.
    Moreover, although there are organizational differences in the 
agencies' rules, these differences are not intended to have any 
substantive effect, and merely reflect the Board's longstanding 
practice of publishing its interpretative rules in a separate staff 
commentary. The Department has no staff commentary, therefore some of 
this material appears in the Department's rule and other material 
appears in its preamble. The consistency of the Department and the 
Board rules is evident based on a comparison of the complete documents 
published by the agencies, including the preambles to the regulatory 
amendments and the revisions to the Board's Official Staff Commentary 
to Regulation B.

Public Comments

    In the proposed rule, the Department invited public comments for 
consideration in drafting a final rule. The Department received a total 
of 52 public comments, 18 of which were from lenders, 16 from public 
interest organizations, 15 from lending industry associations, and one 
each from a law firm, a government agency, and an individual. The 
comments are addressed in the Section-by-Section Analysis of this final 
rule preamble. The Department revised the proposed rule based on its 
consideration of the comments received. The Department also made 
editorial, non-substantive revisions to use plain English wherever 
possible and to meet Congress's mandate of substantial similarity 
between final rules issued by it and the Board. The preamble discusses 
the revisions made to the proposed rule to effect a substantive change.

Existing Self-testing Policies

    The Department notes that prior to the amendment of the FHAct to 
create this privilege, several agencies stated their enforcement policy 
in regard to self-testing by a lender.\1\ To the extent this final rule 
does not contravene an agency's or department's enforcement policies, 
those policies remain in effect until the agency or department 
determines otherwise. Accordingly, for example, OCC Bulletin 95-51 
(September 15, 1995) remains in effect. The Department's prior policy, 
on the other hand, is superseded by this regulation.
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    \1\  OCC Bulletin 95-51 (September 15, 1995); Deval Patrick, 
Assistant Attorney General for Civil Rights, Letter to the Mortgage 
Bankers Association, et al. (February 21, 1995).
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Review of Rule

    As the proposed rule noted, in developing the regulation to 
implement the self-testing privilege, the Department seeks to provide a 
real incentive for innovative, effective, and non-routine fair lending 
monitoring and self-correction while ensuring the rights of 
discrimination victims. Lending discrimination, however, is an evolving 
area of the law, and modifications may be appropriate. Therefore, the

[[Page 66425]]

Department and the Board may review this rule, including the definition 
of self-test, after several years' experience. Should it determine to 
conduct such a review, the Department will seek public comment on 
whether the rule should be amended. A review would focus on whether the 
self-testing incentives created by Congress and implemented in this 
rule should be strengthened, and whether the definition of self-test 
should be broadened. Since there is a corresponding relationship 
between the breadth of the definition of self-test and the scope of 
corrective actions, the review would also examine the extent to which 
corrective actions as defined in the rule provide appropriate relief 
for victims of discrimination.

II. Changes From the Proposed Rule

    This final rule includes several changes from the proposed rule:

--The statement of the general rule applying the self-testing privilege 
contained in Sec. 100.140 has been modified to reflect the need to 
address only likely violations and to incorporate the requirement to 
take appropriate corrective action. As a result, Sec. 100.141 of the 
proposed rule is deleted and the sections which followed were 
renumbered. As more fully explained in Sec. 100.143, Appropriate 
Corrective Action, the revised rule provides a privilege when a lender 
takes corrective action which is reasonably likely to remedy the cause 
and effect of a violation identified by a self-test in instances where 
it is more likely than not that a violation has occurred.
--The section on Definitions, now Sec. 100.141, explicitly includes 
applicant and customer surveys within the definition of self-test and 
makes clear that self-tests are not limited to the pre-application 
stage of loan processing.
--Section 100.142 now specifies that material such as appraisal 
reports, loan committee meeting minutes, underwriting standards or 
compensation records is not privileged, nor is any information or data 
derived from them privileged.
--As discussed above, Appropriate Corrective Action, Sec. 100.143, now 
refers to ``likely violations'' rather than ``possible violations.'' 
Rather than requiring appropriate corrective action to address possible 
violations, this section now specifies that corrective action is only 
required when it is more likely than not that a violation occurred, 
even though no violation was adjudicated formally.
--The proposed rule Sec. 100.141 requirement (now deleted) that lenders 
``take whatever actions are reasonable in light of the scope of the 
possible violations to fully remedy both their cause and effect'' is 
now addressed in Sec. 100.143(b), which requires a lender to take 
action ``reasonably likely to remedy the cause and effect of a likely 
violation.''
--A new Sec. 100.143(c) states that to establish a privilege a lender 
is not required to provide remedial relief to a tester in a self-test; 
is only required to provide remedial relief to an applicant if the 
self-test identified that applicant as one who was more likely than not 
the subject of a violation; and is not required to provide remedial 
relief to a particular applicant if the statute of limitations 
applicable to the violation expired before the lender obtained the 
results of the self-test or the applicant is otherwise ineligible for 
such relief.
--The illustrative list of appropriate corrective actions contained in 
Sec. 100.143 no longer includes notifying persons whose applications 
were inappropriately processed of their legal rights.
--Section 100.143(f) clarifies that taking appropriate corrective 
action is not an admission a violation occurred.
--Section 100.145(b), Loss of Privilege, specifies that lenders will 
not lose their privilege by notifying persons about remedial relief.

    In discussing the public comments received on the proposed rule, 
the next section provides a more detailed description of these and 
other changes made in the final rule.

III. Section-by-Section Analysis of the Rule

Section 100.140  General Rule

Voluntary Self-Testing and Self-Correction
    Section 100.140(a) states the general rule that the report or 
results of a self-test a lender voluntarily conducts or authorizes are 
privileged if the lender has taken or is taking appropriate corrective 
action to address likely violations identified by the self-test. The 
privilege applies whether the lender conducts the self-test or employs 
the services of a third-party. Data collection required by law or 
governmental authority is not a voluntary self-test.
    Subsection (a) also implements the Act's requirement that a lender 
must take appropriate corrective action to address likely violations 
identified by the self-test before the privilege can be invoked. This 
subsection incorporates the requirement that corrective action must be 
taken for the privilege to apply, as stated in Sec. 100.141 in the 
proposed rule. The requirement in the proposed rule Sec. 100.141 that 
lenders ``fully remedy possible violations'' has been modified and is 
now addressed in Sec. 100.143, Appropriate Corrective Action, which 
also discusses ``likely violation.''
Other Privileges
    Subsection (b), a new subsection, clarifies in the final rule 
itself the language contained in the preamble to the proposed rule at 
Sec. 100.140, which stated that the privilege of self-testing is in 
addition to any other privileges which may exist, such as attorney-
client privilege or the privilege for attorney work product. This 
change was requested by some commenters. A lender may assert the 
privilege created by this subpart as well as any other applicable 
privilege.

Section 100.141  Definitions

    The Act does not define ``self-test'' and authorizes the Department 
to define by regulation the practices covered by the privilege. The 
Department received substantial comment on the definition of self-test.
    The Department defines a self-test as any program, practice or 
study a lender voluntarily conducts or authorizes which is designed and 
used specifically to determine the extent or effectiveness of 
compliance with the FHAct. The self-test must create data or factual 
information that is not available and cannot be derived from loan 
files, application files, or other residential real estate-related 
lending transaction records. The final rule substitutes the phrase 
``residential real estate-related lending transaction records'' in 
place of ``records related to credit transactions'' to reflect more 
accurately the coverage of the FHAct.
    Self-testing includes, but is not limited to, using fictitious 
credit applicants (testers), including matched-pair testers. It 
includes surveys of applicants and mortgage customers, and is not 
restricted to the pre-application stage of the credit process.
    As the proposed rule's preamble noted, the principal attribute of 
self-testing is that it constitutes a voluntary undertaking by the 
lender to produce new--otherwise unavailable--factual information. The 
definition contained in the rule provides added incentives for lenders 
to look beyond their business records and develop new factual evidence 
about the level of their compliance. The rule does not define self-test 
so broadly as to include all types of lender self-evaluation or self-
assessment. While versions of the legislation initially introduced in

[[Page 66426]]

Congress extended the privilege to a lender's test or review, the 
statute as adopted refers only to a self-test.
    The Department notes that a lender's analysis performed as part of 
processing or underwriting a credit application is not privileged under 
the final rule. A lender's evaluation or analysis of its loan files, 
Home Mortgage Disclosure Act data or similar types of records (such as 
broker or loan officer compensation records) is derived from loan 
files, application files and other real-estate-related lending 
transaction records and is, therefore, not a self-test and is not 
privileged under this rule. However, new data or factual information 
created as a result of self-testing would be privileged.
    A broader definition of self-testing is within the Department's 
rulemaking authority under the statute. A broad definition of self-
testing, however, was generally opposed by Federal regulatory and 
enforcement agencies, civil rights and consumer organizations, and fair 
lending enforcement agencies.
    As the proposed rule's preamble noted, principles of sound lending 
dictate that a lender have adequate policies and procedures in place to 
ensure compliance with applicable laws and regulations, and that 
lenders adopt appropriate audit and control systems. These may take the 
form of compliance reviews, file analyses, the use of second review 
committees, or other methods that examine lender records kept in the 
ordinary course of business. Notwithstanding any evaluation performed 
by the lender, the underlying loan records are subject to examination 
by the supervisory and law enforcement agencies and must usually be 
disclosed to a private litigant alleging a violation.
    In consultation with Federal regulatory and enforcement agencies in 
developing the proposed and final rules, the Department found that, 
according to a 1994 survey of large depository institutions by one 
regulator, approximately 78% of the institutions surveyed performed 
reviews that included comparative file reviews or statistical modeling 
as part of their fair lending management and oversight. This is 
evidence that an additional incentive for such reviews may not be 
required. Providing a privilege for such reviews could make information 
now provided to supervisory agencies unavailable, and could make 
examinations less efficient.
    A comment letter on the proposed rule from a Federal regulatory 
agency noted:

    We agree that a broader definition of self-test could have an 
unintended negative effect on the levels of cooperation between 
creditors and the regulatory agencies. Institutions use internal 
fair lending audits and reviews to monitor their compliance with the 
Fair Housing Act and regulatory agencies consider them valuable 
examination tools to identify areas most in need of supervisory 
attention . . . [M]oreover, a broader definition could create a more 
confrontational examination setting due to arguments over the scope 
of the privilege. There would be no clear line between documents 
that institutions maintain in the ordinary course of business and 
documents that are part of an internal audit.

    Civil rights and community organization comments generally opposed 
a broad definition of self-testing. A comment letter from a national 
civil rights organization said the self-testing privilege should not 
extend beyond the proposed rule's definition to encompass other self-
evaluations and self-assessments, including fair lending business 
records lenders now maintain routinely. The organization said 
incentives for self-testing should not undermine the strong Federal 
interest in full relief for all victims of discrimination, and should 
not place an undue burden on regulators, enforcement agencies or 
litigants. The letter further noted:

    In general, the new privilege is likely to lead to more lengthy 
and expensive litigation. In the context of litigation or 
enforcement investigation, many lenders will have an incentive to 
overreach by broadly defining ``self-test'' in order to shield more 
information under the new privilege. Furthermore, some lenders may 
try to narrowly define ``any possible violation'' to mean ``only 
clear violations,'' and many lenders may prefer a low standard for 
``appropriate corrective action.'' Plaintiffs alleging 
discrimination, on the other hand, will be forced to challenge every 
assertion of privilege.

    A national community advocacy organization cited the history of 
legal privileges while commenting in opposition to a broad definition 
of self-testing. That organization said:

    Historically in this country, we have granted legal privilege in 
very limited circumstances. It applies to communications between 
individuals and their clergy, to communications between individuals 
and their attorneys, and in few, if any, other circumstances. In 
these cases, the need for open, honest and unrestricted 
communication is viewed as outweighing the need of the legal system 
for access to information. This historical practice of limiting the 
scope of privilege should certainly be applied in this case. It may 
be beneficial to encourage lenders to undertake self-testing. 
However, given the rudimentary nature of the nation's understanding 
of the problem of lending discrimination and the evolving nature of 
the field of fair lending enforcement, it is critical not to unduly 
limit the availability of information necessary to enforce the law.

    Comments from lenders were generally in opposition to a narrow 
definition of self-testing. A coalition of national mortgage lenders 
and servicers said in a comment letter:

    It is clear from the statute that Congress intended a broad 
definition of self-test. Congress essentially forged a quid pro quo 
for obtaining the self-test privilege under which a lender is 
allowed not to disclose self-test reports if it undertakes 
appropriate corrective action with respect to the findings. Given 
this tradeoff, there is every reason to expand the types of self-
assessments which are to be subject to this rule, not limit them. 
Otherwise, Congress' efforts to encourage self-tests will largely 
have been in vain.

    At this time, the Department believes lenders already have adequate 
incentive to conduct routine compliance reviews and file analyses as 
good business practices to avoid or minimize potential liability for 
violations. Therefore, the Department does not believe it is now 
appropriate to extend the privilege to audits of actual business 
records. A broader privilege, which would extend to comparative reviews 
of file contents (whether or not conducted with use of statistical 
methods such as sampling and regression analysis) would greatly limit 
the availability of evidence of violations. To do so also would make 
the analysis of records lenders now maintain as part of routine fair 
lending activities unavailable to supervisory and enforcement agencies 
conducting fair lending examinations. Moreover, it could have the 
unintended result of effectively precluding the use of discovery and 
other fact-finding mechanisms by private litigants seeking relief under 
the FHAct.
    Testing designed and used for compliance with other laws, or for 
other purposes, is not privileged under this rule. For instance, a 
self-test designed to observe employees' efficiency and thoroughness in 
meeting customer needs is not covered by the privilege even if it 
incidentally uncovers evidence of discrimination. The final rule 
clarifies that to qualify for the privilege, a self-test must be 
designed and used specifically to determine the extent or effectiveness 
of a lender's compliance with the FHAct, giving effect to the statutory 
language of the Act at paragraph 814(a)(1). If a test is designed for 
multiple purposes, only the portion designed to determine compliance 
with the FHAct would be eligible for the privilege.
    Some commenters were critical of the emphasis on matched-pair 
testing in the proposed rule, stating such tests are expensive and may, 
due to a small

[[Page 66427]]

sample size, yield statistically invalid conclusions. In addition, some 
commenters maintained such tests are often inadequately performed or 
analyzed, leading to unwarranted conclusions. Matched-pair testing, 
they asserted, is impractical for many small community banks because of 
the expense and because testers would be obvious in many rural areas 
where ``strangers'' would be readily apparent to bank personnel.
    As defined in the final rule, the principal attribute of self-
testing is that it constitutes a voluntary undertaking by the lender to 
produce new factual information that otherwise would not be available 
or derived from loan or application files or other residential real 
estate-related lending transaction records. While this includes 
matched-pair testing, it is not limited to such testing. A lender is 
not required to use matched-pair testing or to test only in the pre-
application process. For instance, a lender could survey mortgage 
brokers with whom it has a relationship to determine whether minority 
applicants were treated similarly to non-minority applicants, or use 
testers (in matched-pairs or otherwise) in the mortgage process.

Section 100.142  Types of Information

    Subsection (a) provides that the types of information the privilege 
covers include: the report or results of the self-test; data or factual 
information created by the self-test; workpapers, draft documents and 
final documents; analyses, opinions, and conclusions if they directly 
result from the self-test report or results.
    The final rule clarifies the self-testing privilege applies to any 
data generated by the self-test, as well as any analysis of that data, 
workpapers and draft documents. Thus, testers, attorneys, auditors, 
experts and others who participate in the testing, or who review the 
results to help the lender determine what corrective action, if any, is 
needed, may not be compelled to produce testimony or documents 
describing these matters. This assurance to lenders responds to 
concerns expressed in the comments.
    Subsection (b) lists exclusions from the privilege. The privilege 
does not cover information about whether a lender has conducted a self-
test, the methodology or scope of the self-test, the time period 
covered, or the dates it was conducted. This list of exclusions is 
exemplary and not exhaustive.
    Commenters differed on whether lenders must disclose the fact that 
tests were conducted, and the scope and methodologies of the tests. A 
few commenters wanted the existence of the test and its methodology to 
be privileged. One commenter suggested that requiring lenders to 
disclose the existence of a self-testing program, its scope, and its 
methodology defeats the purpose of the privilege. That commenter stated 
that only the factual information underlying the analysis should be 
excluded from the privilege coverage. Another commenter maintained that 
since nothing in the statute requires disclosure of the parameters of 
the analysis, the regulation should not require it. Yet another 
commenter stated the rule should limit privilege-related disclosures to 
a reasonable identification of purportedly privileged documents, 
together with a general description of the basis of that claim.
    The Department considered these views. This section of the rule is 
consistent with the statute, which specifically provides that only 
reports or results of self-tests are privileged. The statute does not 
prohibit an aggrieved person, complainant, department or agency from 
requesting information about whether and, if so, how a lender has 
conducted a self-test. Disclosure of the existence of a privileged 
self-test, the self-test's scope, methodology or the time period when 
it was conducted are essential to a decision as to whether to seek the 
final results or report or to challenge the lender's claim of 
privilege. This disclosure is essential to ensure the testing 
information at issue can properly be identified in any proceeding 
challenging a lender's claim of privilege.
    This subsection also clarifies that loan and application files, or 
other real-estate related lending transaction records, or information 
derived from such sources, are not privileged, even if the data is 
aggregated, summarized or reorganized to facilitate analysis. Records 
related to applications submitted by testers are not ``real estate-
related lending transaction records'' for purposes of this subsection 
and may be privileged self-testing records.

Section 100.143  Appropriate Corrective Action

Section 100.143(a)  Generally
    Commenters expressed diverse opinions about the standard by which 
corrective measures should be judged. Several wanted a ``good faith'' 
standard for corrective actions which would be met if the lender in 
good faith takes the corrective actions it determines appropriate. 
Neither the statute nor the legislative history suggests Congress 
intended a ``good faith'' standard.
    Other commenters suggested a ``business judgment rule'' as a 
measure of appropriate corrective action. Under that standard, the 
prevailing practices in the lending industry would dictate what 
corrective actions are appropriate. As with the ``good faith'' 
standard, the Department believes a ``business judgment rule'' would be 
inconsistent with the legislative intent.
    The rule does provide a standard by which corrective actions are to 
be measured. The action must be reasonably likely to remedy the cause 
and effect of a likely violation. Although an action may be taken in 
good faith, it may not be reasonably likely to remedy the cause and 
effect.
    The Department further notes that a lender's determination as to 
whether corrective action is needed, and, if so, what type, is not 
conclusive in determining whether the privilege requirements are 
satisfied.
    If a lender asserts a claim of privilege, the adjudicator would 
have to assess the need for, and the type of, appropriate corrective 
action based on a review of the self-testing results. Such an 
assessment might be accomplished by an in camera inspection of the 
privileged documents, or by sealed pleadings.
Section 100.143(a)  Has Taken or Is Taking
    This subsection also states that the report or results of a self-
test are privileged if the lender has taken or is taking appropriate 
corrective action to address likely violations identified by the self-
test. In some cases, the issue of whether certain information is 
privileged may arise before self-tests are complete or before the 
corrective actions are fully under way. This would not necessarily 
prevent a lender from asserting the privilege.
    In situations where the self-test is not complete, the lender must 
complete the requirements of this subpart within a reasonable period of 
time. To assert the privilege where the self-test shows a likely 
violation, the rule requires, at a minimum, that the lender establish a 
plan for corrective action and a method to demonstrate progress in 
implementing the plan. Furthermore, lenders must take corrective action 
on a timely basis after the results of the self-tests are known. An 
adjudicator's final decision on whether the privilege applies should be 
withheld until the creditor has taken the appropriate corrective 
action.
Section 100.143(a)  Likely Violations
    The Act states that corrective action is required for possible 
violations. Some

[[Page 66428]]

commenters noted lenders have no FHAct liability for ``possible 
violations,'' only proven ones. The term ``possible violations'' means 
that there need not have been an adjudication by a court or an 
administrative law judge before lenders should begin corrective 
actions. Otherwise, corrective actions would only begin following an 
adjudication, which would effectively render the privilege moot.
    The Act requires appropriate self-correction in the case of 
possible violations for the privilege to apply. To implement the Act 
and address the interpretation of possible violations, the final rule 
now refers to ``likely violations,'' which means instances where it is 
more likely than not that a violation has occurred even though no 
violation was adjudicated formally.
    Although corrective actions are required when a likely violation is 
found, a self-test is also privileged when it does not identify any 
likely violation and no corrective action is necessary. The self-test 
incentive would be undermined if the privilege applied only when 
violations were discovered, because the mere assertion of the privilege 
would amount to an admission that it is more likely than not that a 
violation occurred.
Section 100.143(b) and (d)  Cause and Effect
    Some commenters asserted that corrective action must include both 
prospective and retroactive relief to fully remedy both the cause and 
effect of the violations. For example, in the instance of charging 
higher interest rates to minorities, they urged that relief would 
require not only lowering the rate, but reimbursing the overpayment 
with interest, and paying damages for pain and suffering.
    The final rule requires a lender to take corrective action 
reasonably likely to remedy the cause and effect of a likely violation. 
The Department revised the phrase ``fully remedy'' that appeared in the 
proposed rule since, as many commenters argued, that phrase implied 
that damages paid, or remedies provided, would have to equal those a 
court would award if there had been an adjudication. It would be 
difficult or impossible for a lender to determine in advance whether 
corrective action met that standard, and the Act included no such 
requirement. However, there may be situations where the violation and 
the facts known to the lender are such that limiting the corrective 
action solely to out-of-pocket damages would be inappropriate. The 
final rule standard of ``reasonably likely to remedy the cause and 
effect'' intends that payments of out-of-pocket and other compensatory 
damages be determined on a case-by-case basis without any adjudication.
Section 100.143(b) and (d)  Policies or Practices; Extent and Scope
    A lender must: (1) Identify the policies or practices that are the 
likely cause of the violation, such as inadequate or improper lending 
policies, failure to implement established policies, employee conduct, 
or other causes; and (2) assess the extent and scope of any likely 
violation, by determining which areas of its operation are likely to be 
affected by those policies and practices, such as stages of the loan 
application process, types of loans, or the branches or offices where 
likely discrimination has occurred.
    Generally, if the scope of the testing is broad, the need to 
examine information beyond that generated by the self-test is 
correspondingly broad. For example, a lender that self-tests its 
marketing practices and discovers evidence of discrimination may focus 
its corrective actions on its marketing practices, and is not required 
to expand its testing to other aspects of its operation. Also, for 
example, if the testing focuses on a particular loan officer at a 
particular branch, and a likely violation is found, then the lender 
need not commence a nationwide loan file review. Nevertheless, a 
comprehensive examination of that loan officer's activities would be 
required, covering all mortgage loan products handled by that officer.
    In some instances, a pre-application matched-pair test may reveal 
that potential borrowers in minority areas are not offered or made 
aware of the full range of available loan products offered or 
advertised to borrowers in non-minority areas. In this case, the 
lender, in determining prospective relief, should examine its 
marketing, sales, and outreach activities both as a whole and in its 
individual branches, and should implement prospective actions to 
address the results of the test, where necessary.
Section 100.143(b) and (d)  Interagency Guidance
    Subsection (d) provides lenders with additional direction on what 
is appropriate corrective action to remedy the cause and effect of a 
likely violation, as required by subsection (b).
    Several commenters recommended the rule should offer greater 
guidance on what is and is not appropriate corrective action, and on 
how to apply the actions listed in the proposed rule. Some suggested 
the actions listed were too vague, thereby diluting the self-test 
incentive. These commenters generally recommended that specific 
standards be established and limitations be placed upon the amount of 
corrective action required in connection with past discrimination.
    Others maintained a case-by-case analysis invites unrestrained 
second-guessing of difficult judgments on likely violations and 
remedies. Several commenters viewed the case-by-case approach as an ex 
post facto assessment of a lender's corrective actions. Other 
commenters, generally those supporting case-by-case determinations, 
argued that if the rule mandated any particular corrective action, it 
would impede fair lending litigation and/or settlement proceedings.
    The Department carefully weighed the comments received and 
recognizes the need for certainty as to whether corrective actions are 
appropriate. However, it is not possible to develop a standard that 
would describe the specific appropriate action in every hypothetical 
situation. Rather, the final rule contains a standard that describes 
the criteria for determining the corrective action appropriate to the 
fact pattern involved, and retains the general categories developed by 
the Interagency Task Force on Fair Lending.2 The final rule 
does note that not every corrective measure listed need be taken for 
each likely violation.
---------------------------------------------------------------------------

    \2\ 59 FR 18266, 18270-18271 (April 15, 1994).
---------------------------------------------------------------------------

Section 100.143(c)  Prospective and Remedial Relief
    There were many comments with differing views on the issue of 
whether corrective action should be prospective only, or whether 
retrospective actions also should be necessary. Those favoring 
prospective action only argued that Congress intended to eliminate 
disincentives to self-testing, and that a requirement for retrospective 
relief deterred self-testing. Some commenters suggested that while 
corrective action should generally be limited to prospective relief, if 
the self-test has confirmed actual violations of law by the lender in 
connection with the lender's extension of credit to specific 
individuals, retrospective relief may be appropriate. Another commenter 
opposed any unilateral determination and payment of out-of-pocket and 
compensatory damages since such damages are only determinable and 
obligatory following a finding of a violation of the FHAct at the 
conclusion of a contested case.
    With respect to whether remedial relief is required, the final rule 
does not require a lender who seeks to establish

[[Page 66429]]

a self-testing privilege to provide remedial relief to individuals if 
the self-test does not discover evidence of likely discrimination 
against an actual applicant identified by the self-test. Accordingly, a 
pre-application matched-pair test which reveals that potential 
borrowers in minority areas were not offered or made aware of the full 
range of available loan products which borrowers in non-minority areas 
were offered would require prospective, but not remedial, relief 
because the self-test did not discover evidence of likely 
discrimination against an actual applicant identified by the self-test.
    Were lenders required to undertake reviews of loan or application 
files to identify actual applicants who were victims in such instances, 
the result of such a review would not be privileged as a self-test 
under this subpart, since it involves information contained in or 
derived from a loan or application file. Such an outcome, therefore, 
could require a lender who undertook a self-test with the expectation 
of a privilege to be required to provide incriminating evidence.
    It is also worth noting that the fact that a tester has an 
agreement with a lender that waives the tester's legal right to assert 
a violation does not eliminate the requirement for the lender to take 
corrective action although no remedial relief for the tester is 
required.
    Lenders should note that while application of the privilege does 
not require a lender to take extra measures to identify and compensate 
individual victims of discrimination, such persons still may file a 
complaint with the Department or in court and may obtain the remedies 
available in such cases. A lender should consider an effort to identify 
such individuals as a good business practice to avoid or minimize 
potential liability.
    The final rule does not require a lender to provide remedial relief 
to an actual applicant if the FHAct's two year statute of limitations 
3 expired before the lender obtained the results of the 
self-test, or if the applicant is otherwise ineligible for such relief.
---------------------------------------------------------------------------

    \3\ 42 U.S.C. 3613(a).
---------------------------------------------------------------------------

    Changed circumstances might mitigate against giving an applicant 
certain types of relief. For example, a lender is not required to offer 
credit to an unlawfully denied applicant if the applicant no longer 
qualifies for credit due to a change in financial circumstances, 
although some other type of relief may be appropriate.
Section 100.143(e)
    Determination of appropriate corrective action is fact-based. Not 
every corrective measure listed in subsection (d) need be taken for 
each likely violation.
Section 100.143(f)
    In response to commenters who fear incriminating themselves by 
taking corrective actions, the Department added a new subsection (f) 
which provides that taking corrective action by a lender is not an 
admission a violation occurred.

Section 100.144  Scope of Privilege

    This section, which explains the nature of the qualified privilege 
afforded by the Act, states that the report or results of a self-test 
may not be obtained or used by an aggrieved person, complainant, 
department or agency in any: (1) Proceeding or civil action in which a 
violation of the FHAct is alleged, or (2) examination or investigation 
relating to compliance with the FHAct.
    Several commenters wanted the privilege extended to encompass 
alleged violations of State and local fair housing laws. In addition, 
one commenter wanted the Department to clarify that if, in litigation 
involving the Real Estate Settlement Procedures Act (RESPA), a court 
orders a lender to perform a self-test, and to furnish the results of 
that test to the opposing party, those results may not later be used in 
a proceeding or investigation pursuant to the FHAct.
    The Department did not adopt either suggestion. The Act states 
specifically that the self-testing privilege applies only in 
proceedings, civil actions, examinations, and investigations under the 
FHAct. Congress indicated no intent to have the privilege apply to 
actions under any other law, including State and local fair housing 
laws. The Department lacks the legal authority to extend the 
privilege's application beyond the FHAct. However, the Department will 
encourage States or localities, who have sought and received a 
determination that their law is substantially equivalent to the FHAct 
in the rights and remedies accorded, to provide a privilege equal to 
that provided by Congress and implemented in this rule. Such States and 
localities will be asked to provide a privilege through the application 
of their fair housing law, its regulations or binding rules, or they 
must agree to refer all complaints involving lending discrimination 
where the privilege has been invoked to the Department for processing.
    The Department intends to propose rulemaking which would require 
States and localities seeking a substantial equivalency determination 
in the future to accord a self-testing privilege substantially 
equivalent to the Act and this subpart. Under such a rule, if the 
proceeding, civil action, examination or investigation is pursuant to 
the FHAct, or pursuant to a State or local law which has been deemed 
substantially equivalent to the FHAct, the privilege would apply. 
States and localities which do not have laws which are substantially 
equivalent to the FHAct may choose to adopt the privilege for use in 
proceedings under their laws.
    As to the furnishing of information in a RESPA proceeding, the 
self-testing privilege applies only if the test is performed ``in order 
to determine the level or effectiveness of compliance'' with the FHAct. 
Since a court-ordered self-test under RESPA would be performed to 
ascertain compliance with RESPA, rather than the FHAct, the self-test 
would not come within the parameters of the privilege. Consequently, 
unless the court in the RESPA matter ordered that use of the RESPA-
related self-testing information was limited to that proceeding, the 
information would not be privileged in a FHAct proceeding.
    If, however, the RESPA court ordered the lender to produce 
information privileged under the Act, that information could not, by 
virtue of that order, be used in a subsequent FHAct case. The privilege 
would still apply because material privileged under this subpart may 
not be ``used'' in FHAct litigation, regardless of how it was 
``obtained,'' unless it was obtained by the lender's voluntary 
disclosure. Thus, the privilege covers material obtained involuntarily 
in collateral litigation, such as suits filed under RESPA, the Truth-
in-Lending Act, or under State laws.
    Another commenter suggested the final rule's use of the term 
``agency,'' with regard to those who may not obtain or use privileged 
information, must be construed to encompass State, municipal and other 
agencies. The Department agrees that ``agency'' would include a State 
or local agency that sought to obtain or use the privileged information 
in a proceeding or civil action alleging a violation of, or an 
examination or investigation relating to, the FHAct, or pursuant to a 
State or local law which provides for the privilege and has been deemed 
substantially equivalent to the FHAct, as discussed above. If, however, 
the State or local agency sought the information under the auspices of 
a law, other than

[[Page 66430]]

those discussed in the preceding sentence, including a State or local 
fair housing law, the privilege would not apply.

Section 100.145  Loss of Privilege

    This section explains the circumstances that would cause documents 
to lose their privileged status. Generally, the self-test report or 
results are not privileged if the lender or person with lawful access 
to the report or results, or any other information otherwise privileged 
under this subpart, discloses or uses the report, results or such 
information as a defense to charges a lender violated the FHAct, or 
fails or is unable to produce self-test records or information needed 
to determine whether the privilege applies. This section has been 
revised to clarify that the privilege is lost if the lender discloses 
privileged information, such as the results of the self-test, but that 
the privilege is not lost if the creditor merely reveals or refers to 
the existence of the self-test. As discussed, future rulemaking will 
address record retention requirements.
    The Department received a number of comments on this section of the 
proposed rule. Several commenters wanted the rule to specify that 
unauthorized disclosure would not forfeit the privilege. The Department 
did not adopt this suggestion. To do so would require a plaintiff to 
disprove a lender's assertions as to what its internal policies, 
practices, and chain-of-command are, which is an unreasonable burden. 
Moreover, the statute provides that the report or results of a self-
test are not privileged if disclosed by a person with lawful access to 
the report or results. Accordingly, disclosures made by such persons 
are treated as disclosures made by the lender, without regard to 
whether the person was authorized to make the particular disclosure. 
Existing law adequately addresses the issues of scope of employment and 
agency.
    Under the rule, a lender's production of records in response to a 
judicial order, or a disclosure in a case where the privilege does not 
apply, e.g., in a non-FHAct case, does not necessarily mean that the 
lender intended to give up the privilege voluntarily. Accordingly, if 
such disclosures are not voluntary, e.g., under a court order, they 
will not affect the privileged status of the documents.
    One commenter stated that without a record retention requirement, 
lenders could conduct self-tests, find violations, and destroy all 
records without taking corrective action. According to this commenter, 
the rule should require any records, results, analyses, work product, 
or other material related to or created from self-tests to be 
maintained by the lender and/or its agents for at least 48 months if 
litigation or an enforcement action is pending against the lender. The 
Department's proposed rule included no provision on record retention. 
Since the issue was not addressed in the proposed rule, the Department 
has not included it in the final regulation. Instead, the Department in 
the near future will propose for comment a rule on record retention as 
it relates to self-testing information and the FHAct, with appropriate 
recognition of the ECOA requirements in this area. In the meantime, to 
assert the self-test privilege, lenders who are subject to ECOA must 
comply with the record retention requirements of the Board's rule for 
ECOA purposes.
    Some commenters wanted the regulation changed to specify that 
release of part of a report only forfeits the privilege as to that part 
of the report released. However, the statute does not permit this 
result, since it states that release of ``all, or any part of, the 
report or results'' waives the privilege.
    In the proposed rule, the Department solicited comments on whether 
the regulation should provide that lenders could voluntarily share 
privileged information with a Federal or State bank supervisory or law 
enforcement agency without the information losing its privileged status 
in litigation by private plaintiffs. The disclosures on which comments 
were solicited, however, would have caused the documents to lose their 
privileged status with respect to all supervisory and law enforcement 
agencies, e.g., HUD and DOJ, as well as the Board, the OCC, the FDIC, 
the OTS, the NCUA, and the FTC.
    A substantial number of commenters supported the idea. According to 
these commenters, this would encourage lenders to seek guidance from 
regulators in developing appropriate corrective actions. The commenters 
stated further that the Department should draw no negative inferences 
from a lender's decision not to provide information voluntarily. 
Another group of commenters wanted mandatory sharing of self-test 
results with regulatory and enforcement agencies to ensure that the 
scope of the remedy is appropriate and that the remedy is entirely and 
effectively implemented. One commenter strongly opposed allowing 
lenders to voluntarily share privileged information with a supervisory 
agency while maintaining the privilege as to private litigants. Yet, 
another commenter argued that such a mechanism directly conflicts with 
the statute, which specifically provides that voluntary disclosure in 
such instances constitutes a waiver of the privilege. A number of other 
commenters similarly maintained there is nothing in the statute which 
suggests the Department could adopt a partial waiver of privilege. 
Furthermore, they maintained, the law of privileges generally does not 
recognize a right to waive a privilege (as with the attorney-client 
privilege) only as to some parties but not others. According to these 
commenters, several bank counsel expressed reluctance to rely on such a 
split privilege if based on the Department's rulemaking authority, 
absent specific legislative language, or a court ruling upholding such 
an interpretation of the privilege.
    Other commenters supported limited disclosure to determine whether 
appropriate corrective action had been taken, but opposed any 
interpretation of the privilege that allowed blanket protection for all 
voluntary disclosures of ``self-tests'' to banking or enforcement 
agencies so as to immunize banks or enforcement agencies from 
disclosure in private litigation. Another commenter asserted the Act 
was enacted to provide creditors with the necessary protection to 
encourage them to self-test, not to promote cooperation between 
creditors and their regulators.
    The Department concluded that a mechanism that would permit lenders 
to provide privileged information to the independent financial 
regulatory agencies, and simultaneously to enforcement agencies, e.g., 
HUD, DOJ, while still maintaining a privilege as to private litigants, 
is not allowed by the statute. Such a mechanism might help lenders 
secure certainty that the privilege was properly asserted. However, 
some commenters were concerned that allowing disclosure to the 
regulatory agencies with simultaneous disclosure to enforcement 
agencies might result in enforcement action if the self-test were not 
within the statutory privilege, and that this would be a deterrent to 
self-testing. The process would also raise resource issues concerning 
the capacity of the regulatory and enforcement agencies to issue 
advisory opinions. In any case, after careful study, the Department 
determined that in addition to the policy consequences, this step is 
not allowed by the statutory language.

Section 100.146  Limited Use of Privileged Information

    This section provides for a limited use of privileged documents 
that will not be treated as a voluntary disclosure affecting the 
privileged status of the

[[Page 66431]]

documents under Sec. 100.144. The report or results of a privileged 
self-test may be obtained and used solely for the purpose of 
determining a penalty or remedy after a violation of the Act has been 
formally adjudicated or admitted. Disclosures for this limited purpose 
may be used only for the particular proceeding in which the 
adjudication or admission is made. Information disclosed under this 
section remains otherwise privileged under this subpart.

Section 100.147  Adjudication

    The Act provides that the privilege may be challenged in any court 
or administrative law proceeding with appropriate jurisdiction. The 
Department expects such challenges to be resolved according to the laws 
and procedures used for other types of privilege claims, such as 
attorney-client or attorney work product.
    One commenter recommended the privilege remain in effect during the 
period in which an adjudicator is determining whether the privilege 
applies. The Department agrees. As with other privileges, a lender's 
claim that information is privileged protects that information from 
disclosure during the time the adjudicator is determining whether the 
lender is entitled to the privilege. However, the adjudicator may order 
the lender to disclose the information so that the adjudicator can 
determine whether the privilege was invoked properly. The adjudicator 
may require in camera proceedings, the filing of documents and 
pleadings under seal, and the production of documents to other parties 
under a protective order limiting the purpose for which they may be 
used. If the adjudicator orders disclosure for the limited purpose of 
determining whether the privilege was invoked properly, the information 
is protected from use in any proceeding, civil action, examination or 
investigation until the adjudicator determines the privilege does not 
apply.
    One commenter urged that since assertion of, and challenges to, the 
privilege will result in more lengthy and expensive litigation, the 
Department should include a provision for attorney's fees and costs for 
private plaintiffs who successfully challenge the assertion of the 
privilege. If a judge finds, during the discovery phase of a 
proceeding, that a lender improperly invoked the privilege, the judge 
may order appropriate sanctions, including those provided by Rule 37 of 
the Federal Rules of Civil Procedure or by 24 CFR 180.540. In 
appropriate circumstances, this may include attorneys' fees and costs. 
Moreover, the FHAct and its implementing regulations specifically 
provide for the award of attorney's fees to the prevailing party in any 
court or administrative proceeding.4 A party is entitled to 
reasonable attorney's fees and costs to the extent provided under the 
Equal Access to Justice Act.5 Any award of fees would be 
made in accordance with those provisions.
---------------------------------------------------------------------------

    \4\ See 42 U.S.C. 3612(p), 3613(c)(2), and 3614(d)(2); 24 CFR 
180.705.
    \5\ 5 U.S.C. 504.
---------------------------------------------------------------------------

Section 100.148  Effective Date

    Lenders and others may invoke the self-testing privilege regarding 
self-tests undertaken prior to the effective date of the final rule, 
but not if either a formal complaint has been filed involving matters 
covered by the self-test, or if the privilege has been lost pursuant to 
Sec. 100.145. A complaint filed in a court with jurisdiction over the 
FHAct is a ``formal complaint.'' Moreover, as the proposed rule 
preamble noted, a formal complaint alleging a FHAct violation includes 
one filed with the Department or a substantially equivalent agency 
(pursuant to subsection 810(f) of the FHAct, 42 U.S.C. 3610(f)). Any 
other interpretation would conflict with Congress' intent in the Fair 
Housing Amendments Act of 1988 to establish an administrative process 
that is an equally effective alternative to the filing of a complaint 
in a Federal court.

Technical Correction to 24 CFR Part 103

    A final rule published October 4, 1996 (61 FR 52216) consolidated 
HUD's hearing procedures for nondiscrimination and equal opportunity 
matters in a new 24 CFR part 180. In that rulemaking, conforming 
changes were made throughout 24 CFR to replace references to parts 
eliminated as a result of the consolidation with references to new part 
180. Although part 103 was included in the list of parts in which all 
references to part 104 were to be replaced by 180, paragraph (b) of 
Sec. 103.215 contained two references to 104, and only the first 
reference was changed to 180. The reference in this paragraph to 
Sec. 104.590 is corrected to read Sec. 180.545. Similarly, references 
to part 104 are corrected to read part 180 in Secs. 103.1(c), 
13.230(a)(1), 103.405(b)(2) and (3).

IV. Findings and Certifications

Regulatory Planning and Review

    This rule has been reviewed in accordance with Executive Order 
12866, issued by the President on September 30, 1993 (58 FR 51735, 
October 4, 1993). Any changes to the rule resulting from this review 
area available for public inspection between 7:30 a.m. and 5:30 p.m. 
weekdays in the Office of the Rules Docket Clerk.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 establishes 
requirements for Federal agencies to assess the effects of their 
regulatory actions on State, local, and tribal governments and the 
private sector. This rule does not impose any Federal mandates on any 
State, local or tribal governments or the private sector within the 
meaning of the Unfunded Mandates Reform Act of 1995.

Environmental Impact

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.19(c)(1) of the Department's 
regulations, the policies and procedures contained in this rule do not 
direct, provide for assistance or loan and mortgage insurance for, or 
otherwise govern or regulate property acquisition, disposition, lease, 
rehabilitation, alteration, demolition, or new construction, or set out 
or provide for standards for construction or construction materials, 
manufactured housing, or occupancy, and therefore, are categorically 
excluded from the requirements of the National Environmental Policy 
Act.

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)) has reviewed and approved this rule, and in so doing 
certifies that this rule will not have a significant economic impact on 
a substantial number of small entities, because the rule only proposes 
to implement a statutory provision that allows an evidentiary privilege 
for the report and results of self-tests of FHAct compliance undertaken 
by lenders.

Executive Order 13145, Protection of Children From Environmental Health 
Risks and Safety Risks

    This rule will not pose an environmental health risk or safety risk 
for children.

List of Subjects

24 CFR Part 100

    Aged, Fair housing, Individuals with disabilities, Mortgages, 
Reporting and recordkeeping requirements.

24 CFR Part 103

    Administrative practice and procedure, Aged, Fair housing, 
Individuals with disabilities, Intergovernmental relations, 
Investigations, Mortgages, Penalties,

[[Page 66432]]

Reporting and recordkeeping requirements.

    Accordingly, parts 100 and 103 of title 24 of the Code of Federal 
Regulations are amended as follows:

PART 100--DISCRIMINATORY CONDUCT UNDER THE FAIR HOUSING ACT

    1. The authority citation for part 100 continues to read as 
follows:

    Authority: 42 U.S.C. 3535(d), 3600-3620.

    2. In subpart C, new sections 100.140, 100.141, 100.142, 100.143, 
100.144, 100.145, 100.146, 100.147, and 100.148 are added to read as 
follows:


Sec. 100.140  General rules.

    (a) Voluntary self-testing and correction. The report or results of 
a self-test a lender voluntarily conducts or authorizes are privileged 
as provided in this subpart if the lender has taken or is taking 
appropriate corrective action to address likely violations identified 
by the self-test. Data collection required by law or any governmental 
authority (federal, state, or local) is not voluntary.
    (b) Other privileges. This subpart does not abrogate any 
evidentiary privilege otherwise provided by law.


Sec. 100.141  Definitions.

    As used in this subpart:
    Lender means a person who engages in a residential real estate-
related lending transaction.
    Residential real estate-related lending transaction means the 
making of a loan:
    (1) For purchasing, constructing, improving, repairing, or 
maintaining a dwelling; or
    (2) Secured by residential real estate.
    Self-test means any program, practice or study a lender voluntarily 
conducts or authorizes which is designed and used specifically to 
determine the extent or effectiveness of compliance with the Fair 
Housing Act. The self-test must create data or factual information that 
is not available and cannot be derived from loan files, application 
files, or other residential real estate-related lending transaction 
records. Self-testing includes, but is not limited to, using fictitious 
credit applicants (testers) or conducting surveys of applicants or 
customers, nor is it limited to the pre-application stage of loan 
processing.


Sec. 100.142  Types of information.

    (a) The privilege under this subpart covers:
    (1) The report or results of the self-test;
    (2) Data or factual information created by the self-test;
    (3) Workpapers, draft documents and final documents;
    (4) Analyses, opinions, and conclusions if they directly result 
from the self-test report or results.
    (b) The privilege does not cover:
    (1) Information about whether a lender conducted a self-test, the 
methodology used or scope of the self-test, the time period covered by 
the self-test or the dates it was conducted;
    (2) Loan files and application files, or other residential real 
estate-related lending transaction records (e.g., property appraisal 
reports, loan committee meeting minutes or other documents reflecting 
the basis for a decision to approve or deny a loan application, loan 
policies or procedures, underwriting standards, compensation records) 
and information or data derived from such files and records, even if 
such data has been aggregated, summarized or reorganized to facilitate 
analysis.


Sec. 100.143  Appropriate corrective action.

    (a) The report or results of a self-test are privileged as provided 
in this subpart if the lender has taken or is taking appropriate 
corrective action to address likely violations identified by the self-
test. Appropriate corrective action is required when a self-test shows 
it is more likely than not that a violation occurred even though no 
violation was adjudicated formally.
    (b) A lender must take action reasonably likely to remedy the cause 
and effect of the likely violation and must:
    (1) Identify the policies or practices that are the likely cause of 
the violation, such as inadequate or improper lending policies, failure 
to implement established policies, employee conduct, or other causes; 
and
    (2) Assess the extent and scope of any likely violation, by 
determining which areas of operation are likely to be affected by those 
policies and practices, such as stages of the loan application process, 
types of loans, or the particular branch where the likely violation has 
occurred. Generally, the scope of the self-test governs the scope of 
the appropriate corrective action.
    (c) Appropriate corrective action may include both prospective and 
remedial relief, except that to establish a privilege under this 
subpart:
    (1) A lender is not required to provide remedial relief to a tester 
in a self-test;
    (2) A lender is only required to provide remedial relief to an 
applicant identified by the self-test as one whose rights were more 
likely than not violated;
    (3) A lender is not required to provide remedial relief to a 
particular applicant if the statute of limitations applicable to the 
violation expired before the lender obtained the results of the self-
test or the applicant is otherwise ineligible for such relief.
    (d) Depending on the facts involved, appropriate corrective action 
may include, but is not limited to, one or more of the following:
    (1) If the self-test identifies individuals whose applications were 
inappropriately processed, offering to extend credit if the 
applications were improperly denied; compensating such persons for any 
damages, both out-of-pocket and compensatory;
    (2) Correcting any institutional policies or procedures that may 
have contributed to the likely violation, and adopting new policies as 
appropriate;
    (3) Identifying, and then training and/or disciplining the 
employees involved;
    (4) Developing outreach programs, marketing strategies, or loan 
products to serve more effectively the segments of the lender's market 
that may have been affected by the likely violation; and
    (5) Improving audit and oversight systems to avoid a recurrence of 
the likely violations.
    (e) Determination of appropriate corrective action is fact-based. 
Not every corrective measure listed in paragraph (d) of this section 
need be taken for each likely violation.
    (f) Taking appropriate corrective action is not an admission by a 
lender that a violation occurred.


Sec. 100.144  Scope of privilege.

    The report or results of a self-test may not be obtained or used by 
an aggrieved person, complainant, department or agency in any:
    (a) Proceeding or civil action in which a violation of the Fair 
Housing Act is alleged; or
    (b) Examination or investigation relating to compliance with the 
Fair Housing Act.


Sec. 100.145  Loss of privilege.

    (a) The self-test report or results are not privileged under this 
subpart if the lender or person with lawful access to the report or 
results:
    (1) Voluntarily discloses any part of the report or results or any 
other information privileged under this subpart to any aggrieved 
person, complainant, department, agency, or to the public; or
    (2) Discloses the report or results or any other information 
privileged under this subpart as a defense to charges a lender violated 
the Fair Housing Act; or
    (3) Fails or is unable to produce self-test records or information 
needed to determine whether the privilege applies.
    (b) Disclosures or other actions undertaken to carry out 
appropriate

[[Page 66433]]

corrective action do not cause the lender to lose the privilege.


Sec. 100.146  Limited use of privileged information.

    Notwithstanding Sec. 100.145, the self-test report or results may 
be obtained and used by an aggrieved person, applicant, department or 
agency solely to determine a penalty or remedy after the violation of 
the Fair Housing Act has been adjudicated or admitted. Disclosures for 
this limited purpose may be used only for the particular proceeding in 
which the adjudication or admission is made. Information disclosed 
under this section remains otherwise privileged under this subpart.


Sec. 100.147  Adjudication.

    An aggrieved person, complainant, department or agency that 
challenges a privilege asserted under Sec. 100.144 may seek a 
determination of the existence and application of that privilege in:
    (a) A court of competent jurisdiction; or
    (b) An administrative law proceeding with appropriate jurisdiction.


Sec. 100.148  Effective date.

    The privilege under this subpart applies to self-tests conducted 
both before and after January 30, 1998, except that a self-test 
conducted before January 30, 1998 is not privileged:
    (a) If there was a court action or administrative proceeding before 
January 30, 1998, including the filing of a complaint alleging a 
violation of the Fair Housing Act with the Department or a 
substantially equivalent state or local agency; or
    (b) If any part of the report or results were disclosed before 
January 30, 1998 to any aggrieved person, complainant, department or 
agency, or to the general public.

PART 103--FAIR HOUSING--COMPLAINT PROCESSING

    3. The authority citation for part 103 continues to read as 
follows:

    Authority: 42 U.S.C. 3535(d), 3600-3619.

    4. In the list below, for each section indicated in the left 
column, remove the reference indicated in the middle column from 
wherever it appears in the section, and add the reference indicated in 
the right column:

----------------------------------------------------------------------------------------------------------------
              Section                              Remove                                  Add                  
----------------------------------------------------------------------------------------------------------------
103.1(c)...........................  Part 104.........................  Part 180 of this chapter.               
103.215(b).........................  104.590..........................  180.545.                                
103.230(a)(1)......................  Part 104.........................  Part 180 of this chapter.               
103.405(b)(2)......................  104.410(b).......................  24 CFR 180.410(b).                      
103.405(b)(3)......................  104.410(a).......................  180.410(a).                             
----------------------------------------------------------------------------------------------------------------

    Dated: December 8, 1997.
Susan M. Forward,
General Deputy Assistant Secretary for Fair Housing and Equal 
Opportunity.
[FR Doc. 97-32657 Filed 12-17-97; 8:45 am]
BILLING CODE 4210-28-P